What is a guarantor mortgage?
A guarantor mortgage involves having an extra person, like a family member or close friend, who agrees to guarantee the mortgage repayments for you. It is a popular way of adding extra security and strength to a mortgage application which otherwise might be disapproved and have a limited borrowing facility.
Whilst the guarantor, such as the parents, may not need to pay anything upfront or each month, they are considered the ‘backup’ – so if the main borrower cannot make their monthly mortgage repayments, the guarantor is required to step in and pay on their behalf.
How much can you borrow?
Some UK banks are willing to offer a 100% LTV mortgage provided that you have a strong guarantor in place. This is an impressive offer and means that you may not need any deposit and only have to pay the monthly mortgage repayments.
Other guarantor mortgages are available whereby you are using a guarantor to top up your existing loan offer. Perhaps you can only get a 60% LTV offered by your mortgage provider, but with a guarantor, this can increase up to 70% or 80% LTV.
This is different to a guarantor personal loan which is based on borrowing £500 to £15,000. This is used for personal and lifestyle purposes and not as a mortgage. You can visit here to compare guarantor loans.
When would you use guarantor mortgages?
Guarantor mortgages are most commonly used for first-time buyers as a way to get on the property ladder. Borrowers will use their parents as guarantors to gain approval from banks and mortgage providers. To be eligible, the parents must have an existing mortgage which has mostly been paid off and be in a financial position to cover payments if need be.
Other circumstances include those looking to top up their existing loan offer by getting guarantors involved. Also, for those that are struggling to be approved for a mortgage perhaps because they have no deposit, a limited credit history, poor credit history or are newly self-employed, a guarantor can give them the extra boost they may need.
What are the conditions of guarantor mortgages?
The guarantor must be a homeowner with equity in their home. Furthermore, they must have a good credit rating as someone with a recent IVA, CCJ or bankruptcy is not going to be a good person to cover payments. The guarantor must be a certain age as being retired or too elderly means they may not be around to cover payments if need be.
The guarantor does not necessarily need to be involved for the entire mortgage term, which could be 5, 10 or 25 years. The guarantor is required to maintain this situation until the loan to value ratio has reached an agreed upon point. Lenders will typically want the LTV to have dropped to around 80% before the guarantor is released from the agreement.
Guarantor mortgages can sometimes require a deposit, although the level required does vary. It is possible to get a guarantor mortgage without a loan, but this is typically only available if the guarantor uses their own property as security. This means that worst-case scenario, the guarantor could end up losing their home in order to settle the debt owed.
